At first look, a mortgage for rental properties is the same as a mortgage for a primary residence. However, there are a few key differences you must understand. The increased risk of rental real estate comes with a higher default rate, meaning the borrower is more likely to offer you a slightly higher interest rate. If you are applying for a mortgage for rental property, you must realize some essential requirements. And rules you must qualify for before getting approved by a lender.
The underwriting standards of such loans are rigorous and focus on three critical factors: your credit score, debt-to-income ratio, and down payment. That’s true in the case of a mortgage for a primary home or an investment property. For instance, the minimum down payment you need to secure a mortgage for rental property is much higher than the amount you need for a primary residence. You, as the borrower, may also have to meet stricter debt-to-income and credit score thresholds. Your income and employment history also play a critical role when applying for this loan. Some lenders may even ask you to provide evidence of previous work experience.
How Can You Get A Mortgage For Rental Properties?
Most people believe that becoming a landlord is not easy despite its potential upside. Financing your rental property may sometimes also mean managing an additional mortgage on top of your primary mortgage payment. Moreover, rental income from an investment property is not always consistent. Most professional lenders already know this and ask borrowers like yourself to meet specific standards before approving your application. Look at the following qualifications carefully if you wish to qualify:
Generally speaking, a lender will ask for a minimum credit score of 620. This is necessary if you want to qualify for a mortgage for rental properties. Nevertheless, if you wish to get the best terms and rates, our team from Real Estate Funding Solutions suggests you have a credit score of 750 or more. It is considered an “excellent” range.
Another critical factor that a lender might consider is the debt-to-income ratio. It helps the lender measure what percentage of your monthly income goes into paying off previous debts. Your debt-to-income ratio should be between 35% and 45% to qualify for a rental real estate mortgage. There are several cases when a borrower counts 75% of their projected monthly rental income (determined during the appraisal) as the additional income to help reduce their DTI. However, a potential lender doesn’t need to consider your future rental income if you have never been a landlord before. If that is the case, your overall ability to qualify for a mortgage for rental properties may rely on your income alone.
With a mortgage for a primary residence, it is possible to submit a down payment as low as 3%. This also depends on the specific loan program and lender. If your down payment is anywhere less than 20%, you will be required to pay private mortgage insurance, which helps protect the lender from facing any financial loss if you default on your payment. So, the chances are you will be required to submit a larger down payment of at least 20% to finance a rental property.
Besides showing your lender that you have sufficient income when compared to your current debt obligations, you will also have to show you have enough money in the back. This ensures that you can cover any financial hiccups that may arise during the process. It is always a good idea to have four to six months of reserves in a bank account. It must include the entire mortgage payment with interest, principal, insurance, and taxes.
Are You Ready To Become A Landlord?
Before you sign all the paperwork, you must consider whether becoming a landlord is the right thing for you. Remember that if managed correctly, a rental property can be a financially rewarding investment, and owning a rental property is also a great way to generate long-term wealth and income. Nevertheless, a landlord also has additional issues and costs, such as maintenance, repairs, and problematic tenants. If you do not want to deal with such problems yourself, you can always contact a property management firm for additional costs.
Want To Get Started? Contact Real Estate Funding Solutions Today!
Here at Real Estate Funding Solutions, our team can assist you in finding the best mortgage plan for your rental real estate investment. With years of training and experience, our team will guide you through the entire process and stay by your side until closing. Moreover, we can help you clear any doubts regarding your current or next significant real estate investment. Call us today at +1 855-913-8637, and our team will explain what you need to do to qualify for a mortgage in no time.